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What’s Undeniable Is My Index I Can’t Tell You About

Monday Lakshman Achuthan of ECRI (who I am still convinced is just Jeff Goldblum in a bald cap doing the longest method acting prep work of all time) was on Squawk Box and gave the cockiest fucking interview I have ever seen.

You have to respect the marbles on a guy with no economics or mathematics training to speak of, calling out everyone on the street (never mind that a few shops are predicting recessions as well) saying that the firm for which he simply is the head of marketing and operations is infallible. It’s awesome stuff, markets are wrong, economists are idiots, him and his subscribers are the smartest people on the planet because they are the only people looking at forward looking indicators. Priceless. If you haven’t seen it yet I implore you to click through below.*

The exchange with Steve Liesman went about as viral as finance arguments can when Steve pushed Achuthan for any component of his “contagion of leading indicators” call and he flat out refuses and then blames consensus reliance on physics and models for the divergence from ECRI’s model which of course the only model that works.

I am an economist by training and am regularly in touch with both buy side and sell side economists, in house and elsewhere, so the idea that nobody looks at leading indicators is beyond insane.

As a matter of fact most everyone goes out of their way to focus on leading indicators because measuring based on metrics that are two or three months stale when validated like GDP does not really help your clients who are trying to position for the future.

For example here is the widely followed Conference Board Leading Economic Index courtesy of Dr. Mark J. Perry’s blog for both the long term and short term which has a much longer history and a better track record.

Ok but that’s a similar subscription based service looking to predict recessions, how about sell sides. Luckily Wells Fargo puts out a proprietary leading index and it too has a longer history and a better track record. Lets see what that has to say.

Hmmm maybe they are missing the point though. From what ECRI says, sell sides are crazy physics posers and surely do not have all the information. Again luckily for us, the Fed which has access to every conceivable domestic economic data point also puts out a leading economic index. Schocker alert! It has a longer history and a better track record than ECRI. Let’s see what the Fed has to say.

With all the alternative leading economic measures pointing toward continued expansion, this led me to think along Leisman’s line of thought, what exactly is in the ECRI indicators? Clearly their two recession calls have impressively lead equity markets. So I gave their index a look, and charted against equities which confirmed it does lead the SPX in downturns. Naturally on my end the next look was at ECRI against the bond. What I found was that the their Weekly Leading Index is a near match to the inverse of the trend line on the bond. Here’s the ECRI Weekly Leading Index (which is 16 days lagged mind you) charted against the US Treasury 10y bond future from the quarter the firm launched. It’s not even normalized and it is charted on the same axis.

The ECRI, and the bond for that matter, may be right as rain on the call but if you have a near perfectly inverse correlation with readily available market infromation and one that is currently being intervened in, it’s pretty hard to make the point that you’re infallible, worth your cost, or the only model on the planet worth looking at.

Maybe this might be worth reflecting upon before you tell everyone the black box that you didn’t even develop is the be all end all greatest thing on the planet.

What you’re missing is that the Leading Index is no longer applicable because we are in the ZIRP world. It uses the yield curve as one of its components. If you believe that we can never have a recession because the yield curve is positively sloping then you would not understand what happened in Japan and what will happen in the US and what is happening in Europe. Still sticking with ECRI.

I didn’t say one could not have a recession with a positive sloping yield curve nor that we aren’t currently heading toward a recession. I just think it odd that he would criticize sell side economists with their flawed models while defending a black box model that he sells.

One more point. The Conference Board Series wights Real M2 the heaviest. Check out the astronomical growth in this metric. Some have proffered the idea that M2 has grown at such an astronomical clip because of risk aversion (euro dollar deposits to dollar deposits and stocks to cash) and bank efforts at compliance with Dodd-Frank legislation. Risk aversion and regulatory compliance are hardly “leading” indicators of economic growth. I’d like to see the CB leading series stripped of the yield curve (as per the post by BearRaider above) as well as real M2. Anecdotally, I too am an economist. I routinely see economists on CNBC confuse coincident and leading indicators. I agree that most market economists do pay attention to leading indicators – but not all and perhaps not even most. Precious few economists have done market research within the context of a business cycle.

Valid point that Conference Board does heavily weight the yield curve which is why I am not proposing it as the only thing to take into consideration, but I am unaware of how the curve is reflected in ECRI’s model and with the amount of correlation I would suspect it’s not dissimilar. As far as the importance of placing economic forecasts within the context of the business cycle I could not agree with you more, wish it showed a more prevalent role in both how we take in data and how we extrapolate upon it.

If you look at the LEI vs Real GDP growth, and subtract the upward effect of the yield curve slope component as well as the real M2 surge we saw earlier this year, the message is very slow growth, but not recession.

To Chris Butler’s point, I understand that broader money (M4) which encompasses credit and probably is a good leading indicator has been shrinking for quite some time. I don’t have verification of this, but an economist named Hanke I read suggested this.

I go by track record and ECRI has a sterling record compared to other sooth sayers on the street. As far as I am concerned for a retail investor like myself,depending on forecasts by wall street is like asking a real estate agent when is a good time to buy a house. One gets a completely useless if not already predictable answer.
Besides, if I were Lachmann I would be putting my company’s reputation and credibility on the line with such a clear, definite, no ifs and buts, no this hand and the other hand type of forecast. He must be pretty confident about such a forceful opinion.
By the way, the CNBC crew carries absolutely no credibility with me. And this opinion I came by from watching them over 20 yrs. Bloomberg TV is much better but currently I have no access to it.

When you stoop to character assassination it suggests you have a weak argument. From what you write it seems you didn’t really listen to the interview, let alone do much looking into ECRI itself. Good luck.

Did you think the ECRI would give away the farm on CNBC? No one in their right mind would give away that stuff for free. If you and Liesman want to know what it is all about, how bout you pay for it like their clients do?

Just curious…if six months from now it is clear that the U.S. is in recession, will the author revisit this topic?

I will say that this was the worst interview I’ve seen from Achuthan. Part of that has to do with the fact that CNBC is terrible, but the other part is of course that Achuthan won’t provide any real insight as to what makes his indicators different. Nonetheless, during past recessions that ECRI accurately called, there were many rants just like the one above saying how ridiculous and overconfident those ECRI guys are. Meanwhile, most economists utterly fail and predicting anything accurately.

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